20VC Why 95% of Venture Capital is Not Really Venture Capital The Five Core Levers Needed To Assess Risk and Price a Startup The Future of Venture; Who Wins, Who Loses, What Happens to the Crossover Funds with Will Quist, Partner @ Slow Ventures

In a comprehensive discussion, Will Quist, Partner at Slow Ventures, reflects on the venture capital landscape, sharing insights on the firm's investment philosophy and his journey from a professional water polo player to a VC. Slow Ventures, known for backing companies like Robinhood and Nextdoor, emphasizes the importance of non-consensus investing and the nuanced art of venture capital, which Quist compares to "elk hunting" – a process requiring patience and precision. The conversation also touches on the evolving nature of venture capital, with Quist critiquing the shift towards a less collaborative, more competitive environment, particularly in later-stage investments. He advocates for a balance between classic venture craftsmanship and strategic collaboration, drawing parallels to firms like Sequoia for their successful approach to business and venture. Additionally, Quist discusses the significance of branding for startups, the challenges of secondary market timing, and the role of LP incentives in shaping the industry's future.

• Will Quist is a partner at Slow Ventures, known for insightful perspectives on the future of venture capital.
• Slow Ventures has invested in early rounds of over 500 companies, including Robinhood, Nextdoor, Airtable, and Salana.
• Will Quist's background includes over eight years at Industry Ventures and experience in finance at Bank of America.
• The episode's questions were enhanced by contributions from Frank Rotman, Semil Shah, Cara Norman, and Kanye Makubayla.

"And so I'm thrilled to make that happen today with our welcoming will quist, partner at Slow Ventures to the hot seat now, over the last decade, the team at Slow Ventures have invested in the earliest rounds of over 500 companies, including Robinhood, Nextdoor, airtable, Salana and many more."

This quote introduces Will Quist and highlights the significant impact Slow Ventures has had on the startup ecosystem through their investments.

• HMC manages Harvard University's endowment and was one of the first institutional investors in venture capital.
• HMC seeks to partner with the next generation of investors and entrepreneurs, offering long-term investment horizons and insightful perspectives.
• HMC is described as an exceptional partner and savvy investor by those who have worked with them.

"Harvard Management Company is constantly seeking out the next generation of great investors and entrepreneurs."

This quote emphasizes HMC's role in nurturing new talent in the investment and entrepreneurial space.

• Mercury provides full-stack banking for startups, including FDIC insured bank accounts and various financial tools.
• Mercury Raise connects startups with top Silicon Valley investors.
• Market X offers access to private tech investment opportunities and educational resources for investors.

"Mercury is building full stack banking for startups. Apply in under ten minutes from anywhere for FDIC insured bank accounts, physical and virtual debit cards, domestic and international wires and integrations with gusto, stripe, QuickBooks, plaid, basically every other tool your startup uses."

This quote outlines the comprehensive banking services offered by Mercury to startups.

• Will Quist grew up in the Bay Area with little awareness of the venture capital world beyond the IPO market due to his father's focus as an investment banker.
• His first taste of startups was at Berkeley, where he became involved with startups receiving grants from Haas Business School competitions.
• Will's experience compiling a top 100 company list at Red Herring provided him with a deep understanding of evaluating startups and venture capital.

"I ended up being heavily involved with thousands of submissions, having to review probably 1000 companies. I met with four or 500 companies in person over six months."

This quote details Will's hands-on experience with startups and how it shaped his understanding of venture capital.

• Will Quist joined Industry Ventures, where he was one of the first two associates, alongside Joey from Allbirds.
• At Industry Ventures, he was involved in a wide range of deals, gaining comprehensive experience in venture capital.
• The experience at Industry Ventures prepared him for his role at Slow Ventures, where he found a perfect match in terms of knowledge and expertise.

"I jumped on there, grew that to a couple of billion of Aum, and it was ended being the best thing that could happen in my career."

This quote reflects on the valuable experience and growth Will achieved while at Industry Ventures.

• Will Quist believes that true venture capital involves funding experiments against hypotheses that can dramatically change a company's value.
• He argues that most capital in the industry is not seeking novelty but rather extrapolating from known data and actuals.
• The discussion challenges the notion of what constitutes genuine venture capital and whether large-scale investments still fit within the classic definition.

"95% of venture capital isn't actually venture capital."

This provocative statement by Will Quist suggests that the majority of what is labeled as venture capital today does not align with the original intent of the industry.

• Venture capital involves assessing the risks and rewards of company experiments, which is a simple yet difficult process.
• The challenge lies in balancing various factors, such as product value proposition, market size, and founder expertise, to make informed investment decisions.

"The equation is simple, but understanding how to balance those factors and when to make a bet is hard."

This quote encapsulates the complexity of venture capital decision-making despite the seemingly straightforward nature of the investment process.

• Will Quist observes a shortage of rebels in the venture capital industry, attributing it to the proportionality of rebels to the growing number of firms.
• He suggests that the nature of scaling capital attracts fewer rebels and more individuals who can execute established playbooks.

"I think there's always been a lack of rebels."

This quote reflects on the rarity of unconventional thinkers in the venture capital space and the industry's tendency toward conformity.## Denigration of Returns in Venture

• There is a concern about the impact of new venture models on the traditional venture capital (VC) returns.
• New venture models may take some of the biggest winners, potentially deteriorating the returns of traditional venture capital.
• The discussion differentiates between 'new venture' and 'venture classic' and how they interact.

"Do we see the denigration of returns in venture?" "Does new venture not actually disable or disarm old venture or venture classic?"

• The quotes express the concern regarding how emerging venture models might be affecting the traditional VC returns and the dynamics between the two models.

• Scale can disincentivize backing novelty due to potential conflicts of interest and the risk of looking silly.
• Traditional venture funds might avoid investing in early-stage companies to prevent conflicts with larger, later-stage investment opportunities.
• Sequoia is highlighted as an exception among multi-stage funds that honors conflict policies.

"I think there's a real incentive when you're operating at scale to not back novelty." "The only big multi-stage fund that does care and honor it really well is Sequoia."

• These quotes discuss the strategic behavior of large venture funds and how they manage potential conflicts of interest, especially when it comes to investments in early-stage companies.

• Venture funds are described as making option bets, particularly at the seed stage.
• The discussion touches on the lack of price sensitivity among multi-stage funds when investing in seed rounds.
• There is a debate on whether multi-stage funds worry about potential losses and conflicts at the seed investment level.

"They're option bets for them." "Do they worry about them going wrong? Nah, they're seed."

• These quotes reflect the strategic approach of multi-stage funds when investing in seed rounds, treating these investments as option bets with less concern for potential losses due to the relative size of the investment.

• The underwriting process for venture capital involves asking the same questions across asset classes but with different nuances in the answers.
• The discussion includes a reference to Charlie Munger and the search for universal principles of investing.
• The underwriting process in venture capital is about betting on theories and financing companies to test these theories.

"Does the questioning and underwriting process change when being a click further out from consensus?" "You ask the same questions. The nuance is what answers make you most comfortable in pricing it over the rest of the market."

• These quotes highlight the importance of the questioning process in venture capital and how it adapts when venturing further from consensus views.

• The importance of a product's value proposition is emphasized over macro and political factors.
• The discussion acknowledges the existence of black swan events that can impact investments.
• The conversation debates whether success with one novel theory increases the odds of a second novel idea.

"My immediate reaction is, I think you failed to create a product that has such easily identifiable value proposition." "Are there some black swan things that can wipe out every investment? The answer is yes."

• The first quote underscores the critical role of a product's value proposition in its success, while the second quote acknowledges unpredictable events that can affect investments.

• The risk matrix framework is discussed in relation to the five questions that venture capitalists should consider.
• The framework helps determine the level of theoretical versus data-backed answers to these questions.
• There is a discussion about the risks associated with backing too many theoreticals in venture investments.

"How do you think about the risk matrix and the framework with which you apply risk to each investment decision?" "There's a point at which you're backing too many theoreticals and you can't put a price on it."

• These quotes discuss the process of applying a risk matrix to investment decisions and the dangers of investing in too many unproven theories.

• The conversation touches on the concept of building antifragile portfolios and the potential for higher loss rates when investing one click away from consensus.
• The debate centers on whether a higher loss rate necessitates more lines in the portfolio or more aggregate optionality.
• The idea of offsetting higher loss rates with massive economic wins or a more indexed portfolio is discussed.

"Is your loss rate not higher, given it's one click away and it's less consensus, less down the fairway?" "You need more aggregate optionality."

• The first quote questions the potential for increased loss rates when deviating from consensus investments, and the second quote suggests a strategy for managing this risk through aggregate optionality.

• Predictions for the venture capital landscape over the next three to five years include the possibility of more capital gains.
• The discussion reflects on the potential for venture capital firms to look alike in the future.
• The conversation acknowledges the complexity and simplicity of venture capital as an industry.

"When you look out at venture over the next like three to five years, how do you think it looks then?" "They all end up looking alike."

• These quotes speculate on the future of the venture capital industry and whether firms will converge in their strategies and appearances.## Venture Capital Market Dynamics

• The venture capital market is experiencing changes similar to those seen in investment banking and private equity.

• Firms that have specialized and adapted early to these changes are expected to succeed.

• Those slow to adapt will struggle to find their place and gain competitive advantage.

• A large middle group of firms may find it difficult to find edge and alpha in the market.

• Massive shifts in the market can temporarily level the playing field, allowing various players to succeed.

"I think the pie gets bigger, but unfortunately it subsists less people." This quote implies that while the overall market for venture capital is growing, the number of players who can successfully operate within it is shrinking.

"You'll see firms that have picked a quadrant and set up their organization and strategy work really well." This quote suggests that firms which specialize and strategically position themselves in a particular sector of the market are likely to perform well.

"Everything in venture is always capital by like when there's a massive shift, it creates so much margin for everyone that all bets are off for a little while and everyone can continue to play." This quote indicates that significant market shifts can create opportunities for many players, but this is usually a temporary situation.

• Venture capital firms can take a long time to fail, making it difficult to gauge their success in the short term.
• Lagging data from previous successful investments can lead to new funds being raised despite current performance.
• There is a shift towards zero-sum behavior in the venture capital industry, with firms absorbing large amounts of limited partner (LP) dollars.

"The other hard thing is it takes a while to die in venture." This quote acknowledges the prolonged nature of success or failure in venture capital, making it hard to quickly determine a firm's viability.

"This is the first time we're really seeing a zero sum type behavior in people that can absorb LP dollars in such mass." This quote highlights a new trend where venture capital firms are competing more aggressively for limited partner investments, leading to a winner-takes-all scenario.

• Limited Partner (LP) incentives are primarily based on salary and bonus, influencing their investment decisions.
• LPs may prefer stable, lower-return investments with established funds over higher-risk, potentially higher-return ventures.
• The expectation for returns on large funds is moderated, with LPs looking for exposure and acceptable returns rather than exceptionally high returns.

"Mostly it's salary and bonus. If that's the case, you would absolutely give money to you name your large multistage fund with accredited brand, even though you know it's a 1.6 to 1.8 x." This quote reflects on the conservative incentive structure for LPs, leading them to invest in larger, more established funds with moderate returns.

"On a $6 billion fund expecting 30% to 40% net IRRs isn't reasonable." This quote indicates that for large funds, LPs have realistic expectations of returns and are not aiming for excessively high Internal Rates of Return (IRR).

• The transition from underwriting to competing for deals has led to a premium on winning popular deals.
• There is a shift from careful, selective investment strategies to a more aggressive approach due to the abundance of capital.
• The venture capital industry is becoming less collaborative, with larger funds having less incentive to share risk and collaborate.

"The transition to competing to win deals versus underwriting there became a real premium on, hey, this is something everyone likes." This quote describes the shift in focus from careful deal analysis to competing for popular deals that attract widespread interest.

"New venture is less collaborative than ever, and the incentive structure is to be less collaborative." This quote suggests that the venture capital industry is moving towards less collaboration among firms, driven by changes in incentive structures.

• Price sensitivity is a major concern in venture capital, but its importance varies depending on the outcome of the investment.
• Proper allocation of capital is critical and can be more consequential than getting the price exactly right.
• Learning from past investments is key to improving investment strategies.

"The only time pricing really screws you up is when you stay disciplined and miss a dramatic winner." This quote reflects on the dilemma of price discipline potentially leading to missed opportunities with high returns.

"Maybe you got price wrong, but what you really got wrong was allocation." This quote emphasizes the importance of capital allocation over precise pricing in the context of managing a venture portfolio.

• Successful venture investments can defy conventional wisdom and require deep understanding of the business and market.
• Venture investors should think of themselves as investors first, applying rigorous analysis and objectivity to their decisions.
• Learning from successes involves assessing the scalability and defensibility of a business model.

"The learning was to not come to sweeping conclusions, to sift through the business and think through the problem they were proposing solving." This quote emphasizes the importance of thorough analysis and avoiding broad generalizations when evaluating potential investments.

"I don't think enough venture investors think of themselves as an investor first and then venture second." This quote suggests that venture investors should prioritize fundamental investment principles over the perceived uniqueness of the venture capital industry.

• There are many myths in the venture capital industry, such as the importance of being highly price sensitive.
• Strategic decisions and internal mindsets within companies do not change simultaneously; there is a lag in adapting to new strategies.
• Understanding the roles within a company, such as 'special forces' versus 'infantry,' is critical for effective management and investment decisions.

"This is the hard takeaway about price, right? Which is like it matters till it doesn't." This quote highlights the paradox of price sensitivity in venture capital, where it can be crucial or irrelevant depending on the situation.

"The lens I use the most to try to figure out what part of the organization is in special forces mode and what parts in infantry." This quote introduces the analogy of military roles to describe different functions within a company, which can inform investment and management strategies.

• The decision to sell secondary shares is complex and requires a strategic approach rather than a passive 'hold' mentality.
• Reserves are becoming increasingly important in a changing investment environment, with careful consideration needed for follow-on investments.
• The debate continues between spreading investments for more opportunities versus concentrating capital for potential higher returns.

"I'm not sure it's ever healthy to be in hold mode." This quote challenges the traditional approach of holding investments long-term, advocating for a more active stance on buying or selling.

"How do you think about reserves? I think reserves are going to be very different moving forwards." This quote indicates that the strategy around reserves, or additional capital set aside for follow-on investments, is evolving and will be a critical consideration for venture capital firms.## Opportunity Cost and Managerial Perspective

• Opportunity cost is crucial when considering investments, especially when managing limited partners' funds.
• The cost of a bullet metaphor represents the value of investment opportunities and how managers decide to allocate resources based on their confidence in the investment's potential return.
• Managerial decisions are influenced by specific factors such as the manager's background, the fund's strategy, and the firm's overall approach.
• Accumulating stock in high-quality companies during their early years can often be more beneficial than investing in a diversified venture portfolio.

"Yeah, but this goes down to what's your opportunity cost, right. If you have limited partners. Right. Who are support, this goes to your cost of a bullet. Right."

This quote emphasizes the importance of considering opportunity costs when investing other people's money (limited partners) and metaphorically compares investment opportunities to bullets, where one must decide when and where to invest based on potential returns.

"You're almost always better off accumulating stock in those companies over the first eight years of their life than you are in any diversified venture portfolio."

This quote suggests that investing in select high-quality companies early in their lifecycle is often a more successful strategy than spreading investments across a broad venture portfolio.

• Will Quist expresses high regard for Sequoia as an investment management firm and a well-run business.
• Sequoia is seen as having the arc of history in their favor and is expected to continue to work in ways that are advantageous to them.
• The firm is acknowledged for asking critical questions about their business and continuously innovating and defending their market position.

"Sequoia? Not even."

This quote is a succinct expression of Will Quist's utmost admiration for Sequoia, indicating that it stands out as a leading firm without question.

"I think it's a top two or three investment management firm in the world and one of the most well run businesses that I can see."

This quote elaborates on the high esteem in which Sequoia is held, ranking it among the best in the world for both investment management and overall business operations.

• Harry discusses the cyclical nature of success in venture capital, suggesting that a great firm attracts great companies, which in turn draws more outstanding entrepreneurs, creating a self-fulfilling cycle of success.

"I always think, like, success in ventures cyclical. Do you agree with, like, you know, great firm gets great company, which leads to more great entrepreneurs wanting great company."

This quote introduces the idea of a cyclical pattern in venture success, where the achievements of a firm reinforce and perpetuate further success by attracting top-tier entrepreneurial talent.

• Don Valentine's perspective on venture capital as a product and business is highlighted, emphasizing the need for strategic thinking and execution.
• Sequoia's DNA from the start included asking critical questions and creating innovative product sets that add value.
• The firm's ability to innovate and adapt is seen as a model for others to learn from, though not necessarily to emulate.

"And it was clear from that get go that they looked at it, they looked at this as a product and a business."

This quote reflects on the early realization by Sequoia's Don Valentine that venture capital should be approached with the same strategic and business-oriented mindset as any other product or service.

• Will Quist envisions Slow focusing on its strengths rather than expanding into multistage ventures.
• The firm aims to be a classic venture craftsman, making non-consensus intelligent bets, and also to collaborate with other funds and general partners.

"No. I mean, early on I think we would have said multistage. I think the amount of human capital and what it means on a daily basis to be a competitive multistage firm is not what we do."

This quote clarifies that Slow does not intend to pursue a multistage investment strategy, as it does not align with the firm's strengths or operational style.

"I often look to Allen and co. As someone who's done that really well."

This quote points to Allen & Co. as an example of a firm that successfully combines classic venture practices with a collaborative model, something Will Quist is interested in exploring for Slow.

• Will Quist has recently shifted his perspective on the importance of branding, especially for startups.
• He recognizes that while performance marketing is essential, there comes a point where branding can provide higher leverage.
• The timing of when to invest in branding is critical and varies by company, often related to the value proposition.

"I've changed my mind that branding is more important than I thought it was."

This quote signifies a change in Will Quist's opinion, acknowledging that branding plays a more significant role in a startup's success than he previously believed.

• Successful new venture capital firms are considered adept at branding.
• Branding choices by firms like Sequoia, Andreessen, Benchmark, and Founders Fund are seen as intentional and effective.

"I mean, anyone outperforming. I mean, I think sequoia does great, Andreessen does great, benchmark in their own way does great, founders Fund does great."

This quote lists several venture capital firms that Will Quist believes excel in branding, contributing to their success and outperformance in the industry.

• Will Quist discusses Slow's recent investment in Fair Square Medicare, a Medicare brokerage aiming to modernize the purchasing experience.
• The decision to invest was based on the founder's execution and the company's potential for growth through logical strategic moves.

"What got me to a yes was a guy delivering value, executing in the markets, who had several s curves that I thought were pretty logical ahead of him."

This quote explains the rationale behind the investment in Fair Square Medicare, emphasizing the founder's performance and the company's promising growth trajectory.

• Will Quist acknowledges that participating in the podcast has been insightful and has helped him articulate and reflect on his thoughts.

"Yeah, man, this was really fun. Like coming on your show teaches you a lot about what you think."

This quote highlights the reflective nature of the podcast conversation, suggesting that such discussions can help clarify and deepen one's understanding of their own perspectives.